In the first installment of this series we chatted about why it’s important to have a budget. You have goals and dreams and priorities that your budget can help you reach. Today we’re going to chat about the first steps of how to put your budget together. The entire process will be too much information for a single post so please stay with me for Part 2 and the rest of the series.
And before we begin, please understand that I’ll give examples as we go along. Some will be real and some will be numbers pulled from the air. We all live in different places and different situations. If the numbers I share seem really high or really low to you, please remember that they may be right on target for someone else. Try to grab the concept without getting hung up in the numbers and please, please, please leave a comment on this post if you have questions. Your question may be just what somebody else needed to know but was afraid to ask. Your situation may be different than mine but exactly like something that somebody else has lived through. Asking questions will allow others to advise you, too.
I also need to state that I am not a certified financial planner, accountant, or investing professional. I am a mother who learned personal finance from the “School of Hard Knocks” and is willing to share what she’s learned in the spirit of chatting with a friend over coffee. If you require professional advice, please seek it from someone with the appropriate certification.
Wants vs. Needs
The math of working out a budget really isn’t that difficult. As I keep mentioning, the hard part is living on the budget you set up. That’s why it’s important that your budget be realistic. Don’t tell yourself your family of four can make do with $100 for groceries for the month if you’re currently spending $600. It won’t happen and you’ll just get frustrated and give up. Perhaps you can identify some ways to save and cut your grocery budget to $550 or $500 this month and then make additional cuts later once you’ve learned to live on the reduced amount.
It’s easier to keep going when you have some victories along the way, so give yourself a chance to succeed.
Besides being realistic, another way to improve your chances of success is to be honest about the differences between “wants” and “needs” and to reflect that in your budget. Since we were talking about groceries, let’s continue to use that as an example.
You have to eat. Food is a need, no doubt about it. But what you eat can make a huge difference in your budget. Home-cooked meals are generally cheaper than convenience foods, which are generally cheaper than restaurant meals. Unless you entertain clients for your business, restaurant meals are probably a want. Gourmet ingredients and expensive cuts of meat are probably also a want. Basic food to nourish and sustain you is a need. Thankfully there are many wonderful web sites and blogs dedicated to preparing delicious, satisfying meals on a budget!
Your basic needs are food, clothing, shelter, and transportation. Somewhere in the basics you will probably come across a “sacred cow” of a want posing as a need. You’ll have to slaughter that sacred cow if you want to succeed
Maybe your car is too expensive and you need to get a cheaper one (happened to me). Maybe you really like to dress well and you have all kinds of excuses why you need to spend money on clothes. Maybe your house is eating up half of your take-home pay and you need to relocate. Be aware and be honest. This is a great time to talk to your accountability partner (hopefully you found one after reading the “Why?” article) for some perspective.
So are you ready for the nuts & bolts? Grab your pencil, paper, calculator, calendar, and your spouse, if you’re married, and let’s get started!
How to Build Your Budget
We’ll begin with a basic monthly budget, starting with next month. Draw a line down the middle of one sheet of paper from top to bottom to make two columns. Label the left column “Income” and put “Expenses” at the top of the right column. Income is the money you will have coming in, so list any income you will receive next month. Your salary, your spouse’s salary, any interest or dividends, settlements, child support, whatever you have, list the amount you will receive next month there. If you have irregular income, just list the income you anticipate receiving next month. We’ll talk more about managing irregular income later.
Now that you’ve listed your income, which can be fun, let’s move on to the expenses, which is not so fun. List all of the expenses you’ll have to pay next month. Don’t forget things like your morning coffee, lunches at the office, subscription payments, and other incidentals that can slip in unnoticed (until you’re out of cash). Include investments for retirement or university education funds with your expenses. List anything or any place you will spend or send money. Then make a note of quarterly or semi-annual expenses that will not come due next month but are regular expenses. For example, I pay my auto insurance bill at six month intervals, but it helps to save up a bit each month so I have the money to pay when it’s due.
Listing expenses, particularly with your spouse, can be hard. If you’ve been going out to lunch or spending more on clothes than your spouse realizes then you may need to pause your number crunching and talk about your priorities again. It can be hard if you’re faced with the realization that something you’ve done has slowed your progress toward one of the goals you listed after reading the “Why?” article.
Please let me pause here for a confession: I used to have a cute little sports car that I bought before I got married. I was working a good-paying corporate job and thought I deserved it and could afford it. When my son was born and I wanted to stay home with him it became clear that my car was an albatross that was dragging my family down financially. We sold the car. It was hard. But it was worth it because I had other priorities.
Once you’ve listed your income and expenses, add up your income. This is how much money you have to work with next month. Now add up your expenses. If your expenses are less than your income…GREAT! You’ll have an easier time setting up your budget and saving money because you’re already living below your means.
If your expenses exceed your income, you are going to have a harder time. There’s an old saying…
“If your outgo exceeds your income then your upkeep will be your downfall.”
If you continue to spend more than you make then you’re going to go deeper and deeper into debt. You may have fun in the short term but you won’t reach your long-term goals. Please reorder your spending so you can achieve your goals!
When the budgeting process gets hard, look at your list of goals and priorities. Focus on what you really want rather than what seems urgent at the moment. You are working toward something more important. The short-term pain will lead to long-term gain.
Now grab a clean sheet of paper but keep your Income and Expenses sheet handy. Go down the list of expenses and put them in order from most important to least important. Assign a priority to each, putting the top priority at the top of the list, but do not list dollar amounts next to the expenses. If you are married, you and your spouse should agree and have one list for your family. Remember the basic needs: food, clothing, shelter, and transportation. Those should be at the top. It would be silly to put a vacation ahead of paying for your full-time residence, for example.
As a person of faith, I must mention that our tithe to our church is my husband’s and my top priority. We’ve found that God can help us do more with 90% of our money than we can do with 100% of it without Him. I clearly remember my new-stay-at-home-mommy days, sitting down with our budget and the checkbook after my husband would get paid, writing the tithe check and paying the bills for that pay period, then looking at my husband and telling him I didn’t know how we’d make the mortgage. Just typing those words brings the sick feeling back to my gut. But I can testify that we never missed a mortgage payment.
There’s more to the story that I’ll share as we go through this post and this series, but I can say with certainty that God met us more than half way and He provides. If you’re struggling with outgo that exceeds your income, pause here and say a prayer, then continue working on your budget when you’re ready. I’m praying for you as I type.
Now comes the hard part, particularly if your expenses exceed your income. You need to assign a dollar amount to each expense. Starting with your top priority, which in my case is my tithe, write down the dollar amount associated with the expense. Keep a running total, either on your calculator or on a separate sheet of paper, of how much of your income remains. Then assign a dollar amount to your second expense, and your third, and so on. Update your running total of dollars remaining as you go.
If you run out of dollars then you have two choices: cut expenses or increase income. To cut expenses you’ll need to go back and look for places where you can spend less or items you can cut from the budget altogether. Maybe you get rid of cable or satellite television. Maybe you sell a car. Maybe you pick up a second job, part-time, so you can have some extra money. Maybe you find a better-paying job.
If you have money left after you’ve paid your expenses then you’ll need to assign the leftover money a job if you want it to work for you. Assign it to savings. Assign it to your retirement account or your child’s university fund. Assign it to charitable giving. Or make a deliberate decision to assign it to something fun like a vacation or home renovation.
However you budget your money, whether coming from excess or from shortage, do it thoughtfully and deliberately, not casually or accidentally. Make a plan so your money will work for you to support your goals and priorities. If you don’t tell your money where to go it will just disappear.
Crown Financial Ministries and the Dave Ramsey organization have published suggestions for the percentage of your income you should be spending on different categories in your budget. There’s obviously some wiggle room but they are good guidelines to start. You’ll also want to use some common sense with the guidelines. For example, if you make a million dollars (US) a year then you probably won’t want to spend 9% of your income on food or you’ll weigh a million pounds (or kilos).
Please do two things before the next time we chat. Your first assignment is to write out your entire budget for next month, listing the expected income and assigning a dollar amount to each of the expected expenses. If you have money left after expenses are paid, plan how to use that money to work for you before it gets frittered away. If you are running short, plan how you can economize in some areas of your budget to meet your expenses or look for ways to earn extra income to balance things out. Your income should equal your expenses (including savings and investments) when you’re done.
Your second assignment is to record your income and expenses on your calendar for next month. If you get paid on the 1st and the 15th, then write the dollar amount you expect to be paid on those dates. Then go through your bills and expenses and add them to the calendar on the dates you’ll need to pay them. That means if the water bill is due on the 20th and you have to send it in the mail, allow time for posting and add it to the calendar on the 13th or 15th. It helps to use different colors to indicate money coming in and going out on the calendar, perhaps green for money received and red for money paid. We’ll talk more about the calendar next time but having the dates and amounts filled in will help.
If you’ve been working through the steps with me then you should have several sheets of paper in your budget file.
- Your list of goals and priorities, created as you worked through the “Why?” article and homework.
- Your two-column list of income and expenses, created though this article.
- Your prioritized list of expenses with dollar amounts assigned, also created in this article.
- (Optional) Your running tally of remaining income, created as you assigned dollar amounts to your expenses.
- Your calendar of income and expenses, created as homework for this article.
Remember, you’re working on your budget for next month only. Don’t worry about any other months…you’ll get there when you get there. Start with just the first month. The only way to eat an elephant is one bite at a time, so just take the first bite.
What is/was the hardest part of creating your budget? Do you have any advice for others who may just be starting?
The “How to Budget” series posts are:
- How to Budget: Why?
- How to Budget: How – Part 1
- How to Budget: How – Part 2
- How to Budget: Irregular Income
- How to Budget: Emergency Fund
- How to Budget: Getting Out of Debt
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